Conference Transcript - TNET 2026-05-13

Kyle Peterson, Analyst — Needham

My name is Kyle Peterson. I'm a fintech analyst at Needham. I cover Trinet, and we're going to host a Fireside Chat with them. Up next, we have Mala Murphy, CFO, here. Mala, thank you for joining us. So I appreciate you taking the time. Maybe if you could start off for some of those that aren't quite as familiar, just provide a little bit more of an overview about the company. the history and how long you've been in your role as well. I think that would be really helpful.

Mala Murthy, CFO

It's a pleasure to be here, Kyle. So if I think back to the origins of this company, Trinet has been in existence for, I want to say, about three decades. We started off essentially in the sweet spot of servicing small and medium-sized businesses because we knew the work that they had to do was going to get increasingly onerous. And we spotted an opportunity to be able to service them with the help of technology. So that was the beginnings of the company. I would say what we are, for those who are not familiar with us, is we are a PEO. In fact, I would say we are a pure-play PEO in this space. What that means is we are a professional employer organization. We are the employer of record. And what that entails is we, on behalf of our clients, will take care of not only making payroll, we do tax remittances, we do HR compliance, and importantly, we offer benefits, right, health insurance, as well as workers' comp benefits. So that's what we do. Our revenue model is essentially, think of it as three key areas of revenue. On the PEO side, it is a combination of professional services fees, which allows access to our platform. And then we collect fees on our health insurance and workers' comp. And then we also have a burgeoning ASO business. the ASO business is one where we are not a co-employer but we do offer it's a think of it as a combination of HR services and technology and that is something that we are actually seeing growing nicely in the double digit something that we are very excited about so that's really what Trinet is uh about great um you know that that's really helpful and you know maybe to kind of stay on the theme of kind of catching everyone up uh you know as everyone kind of emerges from the earnings

Kyle Peterson, Analyst — Needham

crush um you guys did have you know a pretty nice start to the year um especially i know like insurance and stuff has been a little rocky but you guys you know beat expectations held the outlook. Maybe if you could walk us through kind of what you guys saw in the first quarter and then some of the trends you guys are seeing, particularly with sales conversions, client conversations, insurance costs. I think that'd be great.

Mala Murthy, CFO

Yeah. So I'll hit on all of those. So Kyle, you're right. I'm pleased with the quarter we delivered. It was a solid quarter. Revenue was essentially in line with what we had provided for overall guidance for the year. We, from an earnings perspective, we deliver strong earnings. If I sort of, you know, unpack that in terms of what drove earnings, I would say there were a few highlights. As we said on our earnings call, we are actually making nice progress on control of our insurance costs. And that certainly drove solid earnings beat in the quarter. The second thing I would say is, you know, we continue to show nice discipline from an OPEX perspective. We are continuing to streamline our OPEX costs, and that is a discipline that I expect will continue. If I think about the drivers of our top-line growth, growth is a priority for us. And if I think about the two drivers of growth, i.e. retention and sales, to the question you asked. We did have higher attrition in January expected. You know, as you know from our insurance cost journey, January really NQ1 was the last of the significant above trend repricing that we needed to, that we had to take. And that certainly drove attrition higher than prior year attrition in the quarter. But I do expect us going forward to be pricing for risk on trend. And that certainly is going to help attrition and help us manage our book better from a WSE standpoint. And we are actually already beginning to see that in the Q2 renewal cohorts, et cetera. So I would say retention improving as we went through the quarter, and I expect that to continue as we go through the rest of the year. From a sales standpoint, you know, interesting dynamic. As we said on the earnings call, we had, if you think about the broker channel, you know, RFPs grew 12% year over year, so, you know, good start to RFP volume. and that is only accelerated as we have gone into Q2. I will say we did see, you know, we had a strong start to new sales in Jan. One thing that we are seeing is an uptick in the fact that it takes longer to actually close deals. Just given the uncertainty that, you know, small and medium-sized businesses are facing, be it trade wars, be it, you know, general inflation, be it energy prices, AI, all of the above, we are seeing, you know, deals taking slightly longer to close. That is something that we are keeping a close eye on. So those are some of the dynamics that informed the solid progress financially that we've made through the quarter.

Kyle Peterson, Analyst — Needham

Okay, great. You know, that is, you know super helpful and you know maybe shifting over to some of the recent changes Trinet has undergone a bit of a makeover over the last few years I think some of that started a little before you joined but also you know some of this is start continued yeah I know there's been some divestitures yeah you guys made a small acquisition you're kind of putting more investments in areas like broker channel and ASO offering. So I guess, could you walk us through what you've maybe de-emphasized, what you've increased emphasis and investments on?

Mala Murthy, CFO

Yeah, it's a great question. You're absolutely right. Under Mike's leadership, what we have done is to essentially increasingly focus on our core. And if I think about what that means, for example, we exited the HRIS business. and, you know, we have launched the ASO business that I talked about. So, you know, that is a way that we are increasingly targeting our business. I would say to you that if I think about some of the actions we have taken, Cocoon is a great example of a recent acquisition that we have done. You know, leave of absence has been a pain point for us. it has been an NPS detractor for us. And, you know, this acquisition certainly allows us to help our, you know, improve our NPS. That has been, for us strategically, a big area of focus. And I would say in general, Kyle, if I think about our growth and how we are allocating capital against our growth, I would say to you, we certainly are going to invest in a very disciplined way, in a very targeted and focused way. We are going to invest in organic growth. We will also invest very judiciously in inorganic growth. Cocoon, as I said, is a great example of that. And then if I think about the rest of our uses of capital, it is against dividends. You know, we have announced, we have paid dividends out. We just announced a dividend increase in our earnings call. And then, you know, certainly share buybacks, as we have done for the last few years, including in the first quarter. So, you know, point being, we are going to be using and allocating our capital judiciously and absolutely pointed at growth.

Kyle Peterson, Analyst — Needham

Okay, great. You know, that's super helpful. And I guess if I think, staying on the mix of offerings and businesses, I guess, is where, is the portfolio today, both on the product and go-to-market side, is it largely where you guys want it to be? Are there other, whether it's capabilities or something that you're looking at scaling either internally or through M&A?

Mala Murthy, CFO

Yeah, yeah. You know, the way I think about it is as follows. One is certainly both organically and inorganically, Kyle, we would be looking to continuously bolster our product capabilities, our service capabilities. So as I said, Cocoon is a good example of that. We will continue to bolster that. We'll also look at where we can add scale, either geographically or, you know, in certain verticals. So that will absolutely be an area of focus. And last but not least, as I said, we are excited by the growth in our ASO business, and we will look into investing in our ASO business. So that's how I think about where we are going to add investments. The one other area that we should talk about is AI. You know, we are absolutely having robust discussions internally on how we adopt and deploy and invest in AI. You know, in our next call, we talked about Trinet Assistant as a great use case of use of AI. And, you know, we are going to continue to invest again judiciously in AI and adoption of AI. So that is also an area of investment that we are looking into. Okay.

Kyle Peterson, Analyst — Needham

Awesome. You know, that's really helpful. And maybe pivoting over to the PEO market more broadly, I guess, how would you describe the competitive dynamics? And then when you guys are looking in winning business or kind of losing it, I guess, like, what's the driving force? I guess, like, I'm assuming sounds like price, especially on the insurance side, definitely plays a role, but I guess what are the other product and service factors that drive these decisions?

Mala Murthy, CFO

If I think about the key drivers of what makes us and keeps us competitive, I'd say there are a few dimensions on that. One is our industry-leading service model. That is something that we have invested in and built over time, you know, I think that is something that we will continue to invest in. Again, this is an area where AI can truly enable us to get stronger even more. And it is, you know, investing in service. At the end of the day, what we hear from the research we do with our clients is people actually want, they like AI, but they actually also want a human at the end of the loop, right? If you think about the moments where we matter, it is in, you know, high stakes moments such as you have to be right about, you know, HR compliance. You have to be right about remitting taxes. You better be right on making payroll. And, you know, you want the right benefits and workers' compensation. So, you know, all of that is enabled by the service we provide. So one I would say that differentiates us is our service model. That's one. The second is from a product perspective, you know, we have always been offering rich benefits. And I would say that is the second. And last but not least, I would say, you know, the increasing focus we have on our go-to market. And by that, I mean, if you think about the broker relationships that we have nurtured over the last couple of years, that certainly is going to, it is already showing up in our numbers, in our sales performance. And that is something that we are going to continue to lean into because, look, if you think about the fact that 90% of small and medium-sized businesses buy the healthcare from brokers. So the way we have gone at brokers is to build partnerships with them. So, you know, understanding how they sell to their customers, to their clients, engaging in that dynamic, and making sure that, you know, the experience with Trinet is frictionless. So those are the ways that we have gone, we have enhanced our go-to-market model. So what I would say is service, product, and our go-to-market.

Kyle Peterson, Analyst — Needham

Great. You know, that's really helpful. And maybe expanding on the concept of the broker channel, I think that's something that steadily you seem to be hearing more and more about since Mike came on board. It seems like we hear a little more, whether it's every quarter or every year, about it. I guess, how has that channel evolved? What are the investments that have been made?

Mala Murthy, CFO

And what inning do you think we're in before it's at a level and scale and part of the business that you guys are are ready to kind of have your flag planting moment with yeah it's a really good question you know i would say um the broker channel is one where you build relationships over time and you know once you do And once you are really embedded in the selling dynamic of brokers, it's one that lasts for a long time, right? So what I would say is I think that if I think about the relationships we have, especially, you know, some of the preferred relationships we have with the big brokers, you know we are every quarter I'm seeing the strides that we are making in continuing to build in that relationship you know we've started a broker council where we bring together people from the broker side we have people from our side and we actually sit and talk about what it is that we are working on what is coming down the the road having their input into that so things like that where we are actually actively engaging with our brokers in, you know, helping us think through what we should be building into our roadmap, et cetera, is one that I feel pays dividends down the road, Kyle. So I would say I'm actually pleased with the increasing strength and solidity of the broker relationships that we have. And again, like I said, you're, you know, if I look at the strength of the RFP volume that we are seeing every quarter from brokers, that is something that I feel is, you know, wind in our sails that will continue to help drive our growth.

Kyle Peterson, Analyst — Needham

Great. Awesome. That's really helpful. Maybe switching, you know, over the topic of AI, I know you kind of touched on it briefly earlier, but that's something pretty much I think we're getting questions from our client base for every company, not just you guys, but I guess kind of a two-part question here. One would be, I guess, what sets you guys apart in terms of level of embeddedness, the element of service, all of these other compliance, all of these other aspects that you think gives you guys a bit of a moat versus more general, broader-use LLMs? And then two, how are you guys using AI in your business operations at all to either do your work more efficiently, faster, whatever it is?

Mala Murthy, CFO

Yeah. So the second one is easier. What I would say to you is we are actually adopting AI, whether it be at the individual level or whether it be at the departmental level or at the enterprise level. So all levels, we are thinking and adopting, thinking about use cases for the adoption of AI. And, you know, I would say to you, you know, I was in a review yesterday with a team on the use cases they have in use of AI. And I'm seeing this sort of becoming a growing trend internally. It's actually really exciting to see how we are seeing more and more people wanting to embrace AI, be champions of use of AI. And the way we are doing, so, you know, some examples is, we talked about this on the earnings call. You know, if you think about our technology and engineering teams, we are seeing 30% more productivity in code generation, you know, 50% more test cases. All of that is AI-fueled. Trinet Assistant, again, if you look at the two weeks between March 30th and April 16th, in a normal year without AI, we would have seen an uptick in call volume that would go typically to our service colleagues. And in a normal year, you would see a 12% increase. We actually saw a 6% decrease, and it got deflected to the AI agents. And what that did is, it allowed our service colleagues to actually handle the more complex, challenging cases. You do that, that is going to help drive NPS, right? So those are the ways that, some of the ways that we are using AI internally. You know, if I think about my office on my finance team, we are actively talking about what are the various ways that we will use AI. It's not if, but, you know, how at this point in time. I think Alex has an IR agent. He does, actually.

Kyle Peterson, Analyst — Needham

He's told me about that a few times.

Mala Murthy, CFO

Indeed, indeed. So now the question you asked on Moat is a really, really interesting one. And here's what I would say to you. If you, again, think about the work we do at our core, you know, we have risk transfer to us as a co-employer, right? What that means is if you think about the fact that we are the ones who are standing to make all the remittances, you can't be wrong, right? There's a reputational risk, there is other risk if you get that wrong. You know, we make payroll. Can't be wrong on that. If you think about the fact that we are offering health insurance and workers' comp, that we underwrite. That is a financial risk transfer to us. We obviously price for that risk. But the fact is, we are essentially taking on that risk. An AI agent is not actually going to be able to do that. Sure. Will AI enable all of the work that we do? Absolutely. And it'll make us do things smarter, better, faster. But at the end of the day, the element of risk transfer that we take on that is fundamental to the work we do is something that we believe is our mode. You can't really substitute that with an AI agent.

Kyle Peterson, Analyst — Needham

Yeah, no, it makes total sense and I appreciate the color there. Maybe moving over to insurance, I know we've touched on it a little bit throughout this conversation, but obviously insurance has been on a profitability perspective running below where you guys would like to see for a while now. And I know there's been a lot of moving pieces with utilization, cost inflation, all that type of stuff. But maybe could you just walk us through and give us a refresher as to what happened, what you guys did in response on the pricing side, how quickly this stuff rolls through the book with cohorts and all of that.

Mala Murthy, CFO

Yeah. So if you think back to a couple of years ago, Kyle, we made the decision to pass on some of our P&L savings via insurance pricing at the same time, unfortunately, that we were seeing inflation and increase in trends, in medical trends. So that certainly, you know, required a course correction for us to be, from an insurance cost ratio and from an overall profitability perspective, to be on a sustainable path going forward, be needed to course correct. You know, comes in and made essentially two decisions. One, we invested a good amount in building up actuarial capabilities and our insurance leadership team. We now have talent that has decades, years collectively, years and decades of experience in actuarial science, in pricing for risk, etc. And that is certainly something that you are seeing show up in the way that we are having better and better grasp and control on our insurance cost ratio. The other really hard decision we made was to reprice our book, and the way we did it was above trend pricing. And that resulted in a tough 2025, as you saw. That resulted also in the attrition we saw in Q1. What I would say is Q1 was really the last significant cohort that we needed to reprice, so it's sort of behind us. And now I would say, looking forward, we are looking at on-trend pricing. Now, healthcare medical trends are still elevated. You know, we are still looking at high single digit trends, if you will. But I would say the repricing that we had to do from our book of business is largely behind us.

Kyle Peterson, Analyst — Needham

Great. Yeah, that's really helpful. maybe pivoting over to kind of what you guys see in the client base I think you guys have I'm sure you we track a lot of hiring data and stuff very closely at a macro level but I guess what we can cobble together from spreadsheets and economic releases is probably a lot less granular than what you guys see with your clients as well as in conversations and stuff that you guys get So I think you guys have a pretty unique perspective, particularly on the S&B side of things. But maybe if you could share a little bit, how have these trends been going? How does this translate to CIE? And just any additional context, I think, would be really helpful for people.

Mala Murthy, CFO

Look, if I think about Q1, I would say, as we said on our honest call, CIE was just a little bit better than what we were expecting. But I'd say overall, Kyle, the CIE remains very muted. Growth remains very muted. What we are seeing is, I would say, layoffs have largely plateaued. Hiring still hasn't really picked up anywhere near the extent that our historical experience would tell us. We are seeing some marginal signs of life in tech and life sciences, a little less in professional services when it comes to hiring. If you look at the last four quarters slash 12 months, we are beginning to see a very, very modest uptick in hiring. But again, nowhere near the extent of what we have seen historically. And so I would say, overall, the picture remains, you know, what we said at the start of the year. You know, CIE growth is going to remain modest, and that's what we are seeing.

Kyle Peterson, Analyst — Needham

Yeah, that's helpful. And I guess just as maybe a confirmation reminder for the audience, you know, being, given you guys kind of run the per-employee-per-month model, being necessarily low-hire, low-fire doesn't have to be a bad thing as long as the employment is stable. Is that fair?

Mala Murthy, CFO

Yes, yes, absolutely.

Kyle Peterson, Analyst — Needham

And then outside of maybe some of the tech and life sciences, is there anything you've noticed, whether it's differences in different metros or any other trends or anything that's been particularly interesting?

Mala Murthy, CFO

Honestly, I would say to call out, nothing jumps out. I would say overall, it remains pretty muted.

Kyle Peterson, Analyst — Needham

Yeah, no, I mean, that is fair enough. And I guess moving back to capital deployment, you know, you alluded earlier that you guys have been, in terms of percentage of free cash flow, return to shareholders. I think you guys are usually either first or second on the companies I look at pretty much every year in terms of percentages.

Mala Murthy, CFO

So obviously that's been a big part of the story. um how do you guys think about that how do you in particular as as you know you continue to get acclimated in the seat um you know balancing buybacks dividends internal capex mna great question how does that all fit in yeah i mean um i'm glad you mentioned our free cash flow that certainly has been a highlight for our story for the last many quarters you know we saw strong free cash flow growth in 2025, even with our overall volumes being challenged with the medical repricing that we took on. We delivered 16% year over year free cash flow growth. If you even look at Q1, same story, right? Strong cash flow generation. If I think about how we are going to use that free cash flow against our capital priorities, I would say to you, let's start with how do we allocate against growth. Growth is a priority. Revenue growth and WSE growth is a priority. And I would say to you, number one is organic and inorganic investments in a disciplined, judicious, targeted way that will support and enable sustainable, profitable growth. So that to, that is one. Second, I would say is dividends. And then the third, I would say on share repurchases, one, absolutely, we will buy back shares to offset dilution. And I would say above that, it is opportunistic. I think we are like many other companies, you know, we will assess what are our needs coming up what are the returns that we can see if we were to deploy that capital into other users versus buying back shares and we will you know do the right thing by both the company and our shareholders yeah I know that I mean that that makes a lot of sense and I think your predecessor you kind of mentioned on the dividend front I think that was started when she was in the role and kind of mentioned, hey, like, you know, this is early, but, you know, one day I'd love to see Trinet be kind of labeled in that dividend aristocrat.

Kyle Peterson, Analyst — Needham

It seems like you guys are continuing down kind of that path of, you know, gradual increases in dividend with free cash flow and stuff. Is that something that remains, you know, a priority?

Mala Murthy, CFO

Yes, absolutely. Absolutely. And, you know, you can see it in our actions that we have taken, even including in the first quarter. So I would say, Kyle, that is something that we hope to be able to support with our free cash flow generation and growth.

Kyle Peterson, Analyst — Needham

Great. Yeah, I mean, so we've carved a lot of ground here. I know we have a few minutes left, so I guess I'll turn it back to you. Do you have any, whether it's closing thoughts, comments, anything like that?

Mala Murthy, CFO

Yeah, I appreciate it. Yeah. Look, at the end of the day, I would say solid start to the year. I would say increasing control on and focus on getting our insurance cost ratios in order. You can see that in the results that we delivered in the quarter. You know, if you think about the year over year favorability, you know, It's roughly half of that was because of the repricing actions we have taken. Half of that was prior period development, as we talked about on the earnings call. Increase, you know, continuing discipline on operating expense and a focus on growth. Growth coming from both retention, as we expect that to, you know, improve as we go through the year, and a continuing focus on sales, both fueled by our direct sales force as well as the relationships that we are building with the brokers. And if I think about use of capital, to recap, it is organic and inorganic investments, supporting dividends, and then buying back shares as appropriate. So that's really our overarching story.

Kyle Peterson, Analyst — Needham

Great. Awesome. We really appreciate it, and thanks to everyone that's on the line. So yeah, I hope you enjoy the rest of the conference, and thanks again for joining us.

Mala Murthy, CFO

Thank you.